ND&S Weekly Commentary 4.17.23 – Most Markets Advance Despite Recession and Inflation Concerns

April 17, 2023

Equity markets were higher globally last week while US Gov’t and corporate bonds had a mild retreat.

For the week, the DJIA moved up 1.20% while the S&P 500 added 0.82%. The tech-heavy Nasdaq grew by 0.30% on the week. Small company stocks, represented by the Russell 2000, rose 1.54%. International markets were generally stronger than the US last week as the MSCI EAFE index gained 2.25% and the MSCI EM advanced 1.66%.  Fixed income, represented by the Bloomberg Barclays Aggregate, had a down week, falling 1.10% as a downtrend in interest rates reversed. The mortgage rate bellwether 10 YR US Treasury closed at a yield of 3.52% (up ~22bps from the previous week’s closing yield of 3.30%). Gold prices continued to climb (+0.80%) and closed at $2,019/oz. Oil (WTI) prices also continued an uptrend off a recent bottom in mid-March (~$67) to finish at $82.16/barrel.

Despite content from the recent FOMC meeting minutes that actually forecasts a recession for the US in 2023 (!), equities continued an uptrend that began in October 2022.  With the Bears arguing we have not seen a proper Bear Market bottom and the Bulls pointing to October, equities are trudging higher.  According to FactSet, the Q1 estimate decline for the S&P 500 is ~6.7%.  This does not support the bull case, yet investors seem to be looking past this and investing for a more distant horizon.  If inflation submits, and interest rates stay stable or move lower, this stormy period for both bonds and equities will likely pass.  In the opposite case, we could simply be in the eye of the storm and have more rough sailing ahead.

Last week’s economic releases included CPI data, which was positive, on a relative basis. The CPI was only up 0.1% compared to 0.4% in the previous month and a 0.2% consensus forecast.  This led to a 5.0% CPI YoY, which was lower than the 5.1% forecast and compares well to a 6.0% YoY for the previous month. Core CPI came in on the forecast target of 0.4% for the month and 5.6% YoY – a tick higher than 5.5% YoY for the previous month.  Equity investors, always looking for sunny skies, thought this was great news.

We are potentially at the pivot point for inflation – is it stuck, is the decline slowing, or is it dropping like a stone?  Like weight loss, the initial move down from peak is much easier than the next stages and we may be seeing some resistance here.  That could mean the Fed will have to further constrict the economy’s intake by potentially raising rates more than the consensus believes, holding rates higher, longer, or both.  The optimists envision a simple slide back to the goldilocks zone of 2-2.5% inflation and full employment.  We have many doubts it will be that simple.

Revenue and earnings reports, as well as future guidance, will be announced over the next few weeks.  These reports are often a catalyst for significant market moves.  In this perverse environment where results that are too good garner fears the Fed will need to move rates higher and hold there longer, it is even a greater guessing game than normal as to how the market will react to Q1 earnings.  While true investors do not get let themselves get too caught up in these gyrations, there are plenty of short-term players who try to capitalize on moment-to-moment news, and that amplifies the market swings.

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”– Benjamin Graham